Conviction and the courage to show one’s mettle in the face of adversity are valued everywhere, perhaps no more so than in the investment community. Yet in the $15.9 trillion U.S. Treasury market, it’s increasingly looking like a fool’s errand to remain a bond bear.
In a surprise to many, U.S. bonds have been a winning long trade in 2019. The Bloomberg Barclays U.S. Treasury Index has gained 3.6%, while a separate index of global sovereign debt is up 2.2%. That’s bad news for a legion of investors, at firms like Franklin Templeton and Loomis Sayles & Co., who had built up bearish positions on government securities. The gains have sent the 10-year yield to 2.24%, the lowest since 2017 and down a percentage point since peaking in October.
“It’s really hard to maintain a bearish view on the Treasury market here,” said Nils Overdahl, a senior portfolio manager at New Century Advisors in Chevy Chase, Maryland. “You’d have to be a very brave soul to do so. It looks like the next move will be closer to 2%” for the 10-year note yield.
Former President Bill Clinton’s political adviser James Carville famously said he wished to be reincarnated as the bond market because of its power over policy makers and politicians, yet the “Ragin’ Cajun” made no inkling of a desire to time its moves. That’s a luxury investment managers don’t have now as 10-year benchmark rates plunge, making many investors wonder if they’ll even stop at 2% -- and if the bond market will start exerting that famous influence over Federal Reserve interest-rate policy.
Not too long ago, JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon and Loomis Sayles fund manager Dan Fuss were among those seeing a path to 4% amid buoyant economic growth and a restrictive Federal Reserve. Ten-year Treasury yields were as high as 3.26% in October. After rising earlier today, they were down 2 basis points at less than 2.24% as of 1:40 p.m. in New York.
Fuss, the 85-year-old vice chairman of Loomis Sayles, is throwing in the towel on 4%. The trajectory in rates has fundamentally changed now that a near-term trade deal between the U.S. and China looks increasingly unlikely, Fuss said. The uncertainty is tying the hands of policy makers at the Fed and other major central banks as they brace for the expected economic hit from the trade war.
“In October, I had thought for sure, here we go -- even as the Trump administration will complain -- the Fed will proceed with their game plan of moving interest rates up and the 10-year yield will top out at roughly 4%,” Fuss said Wednesday by phone. “That was, unless something went bananas with the trade war. Well, guess what?”
It went bananas.
This backdrop has sent a key slice of the yield curve, which is closely watched as a gauge of an impending recession, further into inversion as traders ramp up bets the Fed will actually cut their target rate in 2019.
Still, not everyone is reversing course.